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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22693
Experience:  Taxes, Immigration, Labor Relations
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My wife and I file a joint tax return every year. This year,

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My wife and I file a joint tax return every year. This year, my mother-in-law, who lives with us, received her green card. We started paying her a salary to look after our kids while my wife and I both work. My mother-in-law would like to be able to qualify for Medicare and Social Security benefits if possible. The question is, who pays and how?

According to IRS Publication 926, I am not required to pay any employment taxes nor withhold any taxes for my mother-in-law, since she is my wife's parent, does not meet the exception as defined in the publication, and we file jointly. Is my understanding correct? If so, does that mean that my mother-in-law should consider herself self-employed and pay estimated taxes? Also, am I responsible for generating a W-2 form for her?

Thank you for your time in reading this.
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

Several issues...

-- if you employ your mother-in-law as household employee - you should issue W2 form to her and such wages are not subject of FICA (social security and Medicare) taxes - neither you as an employer nor she will pay FICA taxes on such wages.

-- If your mother-in-law is in business of child care - she may be classified as self-employed - in this case she will file schedule C and pay self-employment tax if her net self-employment income is above $400.

-- you may claim your mother-in-law as your dependent - if her annual taxable income is below $3650 (for 2009) - she is not required to live with you, but you should provide more than half her support to qualify - depending on your income that may be some tax saving for you.

-- to qualify for SS benefits - your mother-in-law should have at least 40 credits. In 2009 - one credit for each $1,090 in net earnings, but no more than four credits per year.

 

Let me know if you need any help.

 

Customer: replied 5 years ago.
Issue #1: I do employ my mother-in-law as a household employee, I suppose. She works entirely in my home and uses one of my cars for transportation. She currently lives in a room in my house. If her income is not subject to FICA taxes, then does that mean she is not eligible for FICA benefits? What could she or I possibly do to make her eligible for said benefits? Also, if I am to prepare her a W2, does that mean I should also be withholding taxes?

Issue #2: My mother-in-law is "in the business of child care" only in the sense that she currently receives income from looking after my two children. She cares for no other children and has no business expenses. You tell me, does this make her "self-employed"? Or is she just a standard wage earner with her as the employee and myself as the employer? If she is self-employed, does that mean she should be paying estimated taxes?

Issue #3: I claimed my mother-in-law as a dependant on my 2008 tax return, but I am scheduled to pay her more than $12,000 this year, which I understand makes her ineligible to be my dependant.

Issue #4: How are SS credits received? Does my mother-in-law earn credits even if her income is not subject to FICA taxes, like you said in Issue #1?
Expert:  Lev replied 5 years ago.

Issue #1: I do employ my mother-in-law as a household employee, I suppose. She works entirely in my home and uses one of my cars for transportation. She currently lives in a room in my house. If her income is not subject to FICA taxes, then does that mean she is not eligible for FICA benefits? What could she or I possibly do to make her eligible for said benefits? Also, if I am to prepare her a W2, does that mean I should also be withholding taxes?
If you do not employ your mother-in-law - means she doesn't provide any services to you, and you do not pay her any compensation - there will not be any FICA tax nor benefits. You need to be clear if you employ your mother-in-law or not.


Issue #2: My mother-in-law is "in the business of child care" only in the sense that she currently receives income from looking after my two children. She cares for no other children and has no business expenses. You tell me, does this make her "self-employed"? Or is she just a standard wage earner with her as the employee and myself as the employer? If she is self-employed, does that mean she should be paying estimated taxes?
The activity is considered a business if it is carried on with the reasonable expectation of earning a profit. If your mother-in-law If she cares for your children with the reasonable expectation of earning a profit - she is in business and is considered self-employed. She may need to pay estimated taxes depending on her tax history (if there is no tax history - there will not be any estimated tax required for the first year) and total tax liability.


Issue #3: I claimed my mother-in-law as a dependent on my 2008 tax return, but I am scheduled to pay her more than $12,000 this year, which I understand makes her ineligible to be my dependent.
Yes - if her taxable income is above $3500 in 2008 - you are not eligible to claim her as a dependent.


Issue #4: How are SS credits received? Does my mother-in-law earn credits even if her income is not subject to FICA taxes, like you said in Issue #1?

Social security are earned only if the person pays FICA tax. If income is not subject of FICA tax - such income is not counted for social security credits.

 

Let me know if you need any help.

 

Customer: replied 5 years ago.
I apologize for not being clear. I am trying to be as clear as possible, but I obviously have confused you. Perhaps my biggest issue is that I don't fully understand how to classify the relationship I have with my mother-in-law. Is she my employee, or is she self-employed and providing me with a service from her "business"?

Rereading IRS Publication 926, it appears that my relationship with my mother-in-law is as an employer, with her as an employee. The publication states:

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done.

This describes my situation. I can dictate certain parameters that my mother-in-law would be obligated to comply with. I pay her a salary for the services she provides in my home. If she were not my wife's mother, then this situation would be easy to understand. I would simply follow the general instructions in Publication 926. But Publication 926 says to exclude certain individuals' wages:

Wages not counted. Do not count wages you pay to any of the following individuals as social security and Medicare wages, even if these wages are $1,700 or more during the year.
  1. Your spouse.

  2. Your child who is under the age of 21.

  3. Your parent. Exception: Count these wages if both the following conditions apply.

    1. Your parent cares for your child who is either of the following.

      1. Under the age of 18, or

      2. Has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter.

    2. Your marital status is one of the following.

      1. You are divorced and have not remarried,

      2. You are a widow or widower, or

      3. You are living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter

My mother-in-law is my wife's parent, and only one condition of the exception is met (condition a). Condition b is not met, since I am still married to my wife and neither me nor my wife has any physical or mental condition. So according to this, I am not to count the wages I pay to my mother-in-law as social security or Medicare wages. Does this mean that I am not required to, or that I shouldn't? Could I withhold Social Security and Medicare if my mother-in-law wanted to be eligible for these benefits? Or is she not eligible as long as she only works for me? If I can't withhold SS and MC for her, could she pay these taxes herself in order to become eligible (as if she is self-employed)? If so, then how?

I have the same question about unemployment benefits. Publication 926 states:

Wages not counted. Do not count wages you pay to any of the following individuals as FUTA wages.
  • Your spouse.

  • Your child who is under the age of 21.

  • Your parent.

Again, does this mean I am not required to, or that I shouldn't? Could I pay the FUTA and make my mother-in-law eligible for unemployment, or is this not possible? Can she pay the FUTA herself if I can't?

BotXXXXX XXXXXne - I need to know what I am supposed to do and what my mother-in-law is supposed to do. My mother-in-law wants to be eligible for SS, MC, and unemployment if possible. It sounds like I don't have to withhold anything from her paycheck, but I would like to if it would make her eligible for SS, MC, and unemployment. It sounds like my mother-in-law doesn't have to do anything until she files her first tax return, but then must make estimated tax payments to the IRS since I am not withholding anything. It sounds like I need to prepare for her a W2. I'm hoping that you can help me nail down exactly what I am required to do, what my mother-in-law is required to do, and what either of us might do in order to make her eligible for benefits, if possible.

Thank you again. Hopefully we are both clear now.
Expert:  Lev replied 5 years ago.

Perhaps my biggest issue is that I don't fully understand how to classify the relationship I have with my mother-in-law. Is she my employee, or is she self-employed and providing me with a service from her "business"?

If your mother-in-law is not in the business of providing child care service - she is considered your employee.

My mother-in-law is my wife's parent, and only one condition of the exception is met (condition a). Condition b is not met, since I am still married to my wife and neither me nor my wife has any physical or mental condition. So according to this, I am not to count the wages I pay to my mother-in-law as social security or Medicare wages. Does this mean that I am not required to, or that I shouldn't? Could I withhold Social Security and Medicare if my mother-in-law wanted to be eligible for these benefits? Or is she not eligible as long as she only works for me? If I can't withhold SS and MC for her, could she pay these taxes herself in order to become eligible (as if she is self-employed)? If so, then how?

As long as the exemption you mentioned doesn't apply to your situation - wages you pay to your mother-in-law are not subject of FICA and FUTA and SUTA tax - that is not your choice - you do not need and you should not neither pay nor withhold FICA taxes.

FUTA tax are paid by an employer - not by an employee. Wages you pay to your mother-in-law is not a subject of FUTA or SUTA tax.

You still should issue W-2 form for your mother-in-law and put zeros in boxes 3 and 5.

 

You may - however count waged paid to your mother-in-law as child care expenses and may claim a credit for that.

That income is taxable as wages for your mother-in-law.and generally should be reported on her individual tax return.

 

BotXXXXX XXXXXne - I need to know what I am supposed to do and what my mother-in-law is supposed to do. My mother-in-law wants to be eligible for SS, MC, and unemployment if possible. It sounds like I don't have to withhold anything from her paycheck, but I would like to if it would make her eligible for SS, MC, and unemployment. It sounds like my mother-in-law doesn't have to do anything until she files her first tax return, but then must make estimated tax payments to the IRS since I am not withholding anything. It sounds like I need to prepare for her a W2. I'm hoping that you can help me nail down exactly what I am required to do, what my mother-in-law is required to do, and what either of us might do in order to make her eligible for benefits, if possible.

There is no way for your mother-in-law to be eligible for unemployment unless she will find a job outside your home.

She may not earned social security credits working as a household employee in your home.

To earn social security credits - she need to work at least 10 years as self-employed of have a regular job outside your home.

To be eligible for Medicaid - she need to become a US citizen, or to have 40 credits, and to be 65 years.

 

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22693
Experience: Taxes, Immigration, Labor Relations
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